Federal Reserve Monetary Policy

As widely expected, the Federal Reserve raised the target range of the fed funds rate by 25 basis points.

The vote of the Federal Open Market Committee was unanimous.

The new Dot Plot is consistent with three 25 basis point rate hikes in 2017 and 2018.

In her press conference Janet Yellen said that she intends to serve out her term as FOMC chair.

At the conclusion of the regularly scheduled Federal Open Market Committee meeting this afternoon, the FOMC announced that they are raising the range of the federal funds rate by 25 basis points to 0.50 – 0.75 percent. They are also raising the discount rate from 1.00 to 1.25 percent. The vote in the FOMC for these moves was unanimous. Today’s policy actions were widely anticipated by financial markets, and are not expected to result in any significant dislocations. The Fed’s announcement said that the economy has been expanding at a moderate pace since mid-year and labor market conditions continue to strengthen. According to the Fed, inflation indicators have moved up considerably, but are still below the 2 percent target. The announcement also said that the Fed will continue to reinvest principle payments from its assets and roll over maturing securities.

In addition to the policy announcement, the FOMC also released a new set of economic projections and a new “dot plot.” The economic projections show a slight increase in expected real GDP growth for 2017, and a slight decrease in the expected unemployment rate. Inflation expectations were unchanged from September. The new dot plot, which shows FOMC member’s expectations for the fed funds rate over the next few years, indicates that the FOMC now expects to raise the fed funds rate three times in 2017 and three times in 2018. It is purely speculative on our part to say that a reasonable pattern for the timing of fed funds rate increases for 2017 might be March 15, July 26 and December 13 of 2017. We will be adjusting our interest rate forecast for 2017 and 2018 upward slightly, based on today’s news from the Fed.

In her press conference, Janet Yellen indicated that her policy of data dependence would continue. That is to say that the fed funds rate is not on a predetermined course and that economic conditions could change and expectations of future interest rate hikes could change as well. She was careful not to specifically endorse a potential Trump Administration fiscal stimulus plan or tax reform strategy. Moreover, she was careful to restate previous statements about running a “hot economy.” She does not recommend letting the economy expand at a rate significantly above potential GDP growth for a period of time in order to absorb remaining slack. She restated her view that the Federal Reserve would eventually wind down its balance sheet by not reinvesting principle payments and rolling over maturing assets once the fed funds rate was well on its way toward normalization. We believe that condition will not be satisfied until late 2017 at the earliest, and more likely later.

Market Reaction: Equity markets dipped on the Fed news. There may be some feeling that Yellen’s apparent walk back of her “running the economy hot” statement could indicate that the potential for a “monetary offset” to new fiscal policy (that is to say, higher interest rates) could potentially limit the lift from fiscal stimulus. Also there is increasing commentary about the potential for a flattening of the yield curve, which could be an early warning signal for the next recession. We think that it is premature to incorporate that view into our near-term forecast. The 10-year Treasury yield is up to 2.56 percent. NYMEX crude oil is down to $50.89/barrel. Natural gas futures are up to $3.56/mmbtu.

For a PDF version of this Comerica Economic Alert click here: fomc-12-14-16.